US Treasury department


The treasury market has been back and forth all year long so far.  First, we saw that huge rally that recently ended but it gave investors the belief that domestic policies were solid and Europe was stable.  As the months rolled by, we began to notice that domestically, conditions are soft here in the US and Europe is now on the brink and fighting for survival.  Pimco’s Bill Gross has been a Treasury bear for quite some time now and while it burned him in the second half of 2011, he thinks its a good idea again!

US Treasuries were typically considered a “safe haven” until the Fed’s QE programs, US debt rating cut and debt level rises.  These three events alone have done a considerable amount of damage to the integrity of the US Treasury bond.  US government bonds were supposed to be your back up, your safety net if the market turned sour.  Now yields are diving and it is no place for investors to be. What seemed like such an obvious short, turned out to be a great long.

While Bill Gross and other Wall Street traders have been US Treasury bears for quite some time, their trade has gone against them.  My point is that traders should stay away from betting against US bonds as the Federal Reserve essentially controls the yield by being able to buy or sell an unlimited amount of US government bonds.  Furthermore, this is no trade for the average long term minded retail investor. In fact this chart shows how bad retail investors would have done buying the 10 year short index (iPath US Treasury 10 Yr Bear ETN).

treasury shorts

In fact, if you are a small long term investor, it is probably best if you stay away from US Treasuries in general.   Their negative yield can probably be beaten by a number of high yielding stocks that give much more “safety” and income than government bonds.

Also need I mention the possibility of a short squeeze? Back in April on, an article by John Carney entitled “Everyone on Wall Street Agrees with Bill Gross: Short Treasuries” gave me a new idea of why to stay away from Treasuries.  There is a likelihood that contrarians could come in and take long positions against the crowd.  I believe this because once there is a “common idea” on Wall Street that is typically agreed upon; contrarians move in and take the opposite side of the trade.

Some of the strong short advocates who agree with Bill Gross:

Wilbur Ross, who is scared of rising debt.

Peter Schiff, who thinks we are headed for a collapse.

Nassim Taleb, who stated it was “no brainer”, and that “Every single human being should have that trade.”

Seth Klarman who is a great contrarian investor, stated that he was using cash to short treasuries.


At this point, you could be at risk for a short squeeze if you have a short position. A short squeeze is when a stock or some other asset is shorted heavily and at some point, there will be a catalyst that drives the stock up, giving the trader with a short position a loss.  After a while, the trader with the short may no longer believe in the short opportunity and will cover his short, where he will buy the stock to offset his short.

Retail investors are still reeling from the Facebook Inc where they feel like they were burned and betrayed once again.  I would not listen to Wall Street’s advice to short US government bonds.  The US and Europe just have way to much negativity and downside potential to be keeping your hard earned money in government bonds.

Before the US and Europe, Wall Street traders used to be big on shorting Japanese government bonds, yet another trade that didn’t work for over 20 years.  Although Japanese markets have been stuck in a range over the past decade and beyond, shorting Japanese assets has never been a very solid trade. This trade has been called the Japanese Widow Maker.

The bottom line is that every time Wall Street gets excited about a new shorting opportunity, they are usually too early or too late in the trade to actually make money.  These strategies should not be involved in your portfolio if you are a long term, value oriented investor.  Don’t follow the herd on this one.

Perhaps US treasuries will soon be known as the US Treasury Widow Maker